Small renewable energy operators fear the worst in pending state contract case

The Michigan Public Service Commission is preparing to put the hammer down on more than two dozen small private and public renewable power operators in a rate decision that some believe will financially benefit Jackson-based Consumers Energy Co., close down the operators and drive up rates to customers.

The MPSC already has issued two partial orders on the rate case in May and July that project prices Consumers should pay to the hydroelectric, biomass, waste-to-energy, landfill gas based on a hypothetical hybrid combined-cycle natural gas power source.

A decision by the MPSC is expected at the regular meeting next Wednesday. The current rate case would create a formula for prices using the process of "avoided costs." It is based on two types of natural gas combustion sources and a variety of energy and capital inputs.

But the avoided-cost formula expected to be approved by the commission would result in rates far below, 14 percent to 30 percent below, what operators receive now. Once approved, the utilities will use the formula in contract negotiations with the renewable operators.

The renewable power operators have been selling clean energy to Consumers for decades under a 39-year-old federal law called the Public Utility Regulatory Power Act, or PURPA. If the three-member commission approves the rate formula proposal, supported by the state's utility industry, operators fear for their future.

"It doesn't make sense that Consumers Energy and the Commission would force unsustainable rates on small renewable generators knowing it would put us out of business, and at a time when Michigan utilities and regulators are concerned over plants closing, all the while electric customers pay more and more, year after year," said Victor Leabu, owner of White's Bridge Hydro, a small hydroelectric facility on the Flat River.

Leabu, who has been paid a variable rate of 6.8 cents to 7.6 cents per kilowatt hour by Consumers, produces about 750 kilowatts of clean, renewable energy for 400 of his home and business owner customers in Ionia County, just east of Grand Rapids. Last year, Consumers offered him a five-year contract at 4.5 cents per kilowatt hour, which Leabu described as financially unsustainable.

In a statement to Crain's, the MPSC said it is in the process of reviewing rates paid to the small renewable power generators.

"The energy landscape has changed dramatically in the past 30 years since many of the avoided costs were set and the state's new energy laws require the MPSC to revisit those costs," Nick Assendelft, a spokesman for the MPSC, said in a statement. "The commission is working transparently and in accordance with the law to develop the best new methodology to be used in setting updated avoided costs. It then will be up to the utilities and PURPA qualified facilities to decide on new contracts."

But Bill Stockhausen, who operates the Elk Rapids Hydro, said the utilities are behind the commission's decisions so far.

"This is clearly a move by the utilities, using their state-sanctioned monopoly to bankrupt small generators," Stockhausen said in a statement to Crain's. "Apparently, Consumers Energy has convinced the commission that my renewable energy and my dam isn't needed anymore and the power they're going to make with their own power plants is somehow cheaper or better. That doesn't hold water, otherwise we'd all be seeing lower electric bills but we're not."

Consumers Energy said in a statement that it wants to provide affordable and clean electricity to its customers.

"The federal law at the center of the PURPA discussion was established to address a national energy crisis nearly 40 years ago. Since then, the market has changed drastically, and customers have subsidized small renewable energy producers by approximately $300 million over the last 10 years," said Consumers in a statement. "By taking a fresh look at the avoided cost rate under the lens of the current energy market, we believe Michigan can come to a solution that is in the best interest of our customers. We look forward to the Michigan Public Service Commission’s guidance on this issue.”

Consumers provides natural gas and electricity to 6.6 million of the Michigan's 10 million residents.

Several members of the Independent Power Producers Coalition of Michigan, which represents the renewable operators, told Crain's it is possible the final commission order will be appealed to the Federal Energy Regulatory Commission.

"If the final order comes out in line with the preliminary orders, then we believe it is not in the public interest and would certainly violate PURPA," Timothy Lundgren, the group's attorney and a partner with Varnum LLP, said in a statement.

Under PURPA, regulated utilities are required to purchase power from renewable power generators under 20 megawatts. The MPSC derives its authority to set rates from PURPA. Utilities must pay the price based on the "avoided costs" to generate the same amount of power used in the current standard power-generation source, which used to be coal.

Using the avoided-cost approach, the rates that utilities pay to qualified generators are based on the costs the utilities would have incurred to obtain electricity from their own power plants or other sources, according to PURPA.

But Tom Vine, plant manager at Viking Energy of McBain, told Crain's that the rate calculations the MPSC is basing its decision on are based on a fictional hybrid combined natural gas cycle source, what he described as a "unicorn power plant." He said federal law requires utilities to pay rates based on the electricity they would need to generate or buy themselves using existing technology, not based on a power generating source that doesn't exist.

The MPSC has said in case filings they must update their avoided-cost methodology because the way prices were set 30 years ago under the federal PURPA law have changed. For example, utilities have moved away from coal to using a variety of types of natural gas generation as a baseload power source. Electricity also is purchased off a wholesale regional market that has a mix of nuclear, coal, gas and renewables as part of the energy mix.

In Michigan, there are more than 30 renewable energy providers — generating more than 500 megawatts of power for 500,000 homes — some of which are IPPC members and many of which have contracts set to expire from 2017 to 2039. Operators will keep their current pricing arrangement until their contracts expire.

There are six other regulated utilities in Michigan, including DTE Energy Co., that also have similar cases before the MPSC. Consumers Energy by far has the largest number of renewable-energy contracts of this kind.

The potential loss of renewable energy sources is ironic, energy experts say, because Michigan's new energy law requires utilities to produce 15 percent of energy from renewable sources by 2021. A previous 10 percent renewable energy goal was reached in 2015.

IPPC officials said they have supported previous commission staff recommendations that created an avoided cost formula that calculate out to rates in the range of 7 cents to 9 cents per kilowatt hour, which would fund required capital improvements, employee salaries and benefits.

However, MPSC staff's last recommendation, issued June 19, suggests that rates could fall under 7 cents per kilowatt hour, ranging from as low as 5 cents to 7 cents per kilowatt hour, depending on the type of renewable source.

Commission staff explained that they revised its avoided cost methodology to reflect changes in fixed charges for combustion turbine, and natural gas price forecasts, locational cost variances, fixed charges and discount rates. The avoided cost calculation is based on a complicated formula that takes into account numerous energy and capital factors.

Leabu said hydroelectric stands to be the biggest loser as the rate methodology, known as "zonal resource credits," could cut hydro rates under 6 cents because hydroelectric dams could be considered "intermittent energy resources." Wind and solar also considered intermittent because they do not produce energy 24 hours a day.

"No hydro plant can sustain operation and maintenance of a dam for 20 years at this rate," he said.

The Michigan PURPA cases have national implications for renewable energy operators and regulated utilities, especially in Midwestern states. Utilities in other states are hoping that Consumers prevails as the case could serve as a model to drive down PURPA rates, experts said.

The IPPC contends that the formula the MPSC is using to calculate "avoided cost" produce rates that are 14 to 30 percent below their current rates. Operators say they can't cover capital costs, pay employees and invest in future improvements.

If the MPSC prevails along its previous decisions, the IPPC warned of the loss of millions of dollars in local economic benefit, mostly in rural areas, and taxpayers would wind up bearing the cost to maintain abandoned dams. In addition, it warned that a $100 million municipal waste-to-energy facility in Kent County could be shuttered creating the need for a new system of waste management for the county.

Small renewable operators speak out

"The methodology and inadequate rates being proposed make it difficult for Hillman Power Co. to envision a future of continued operation," Doug Audette of Hillman Power Co., a 20-megawatt biomass plant in Montmorency County, said in a statement.

Hillman has been producing and providing baseload renewable energy and transmission system support in Northern Michigan since 1985. If the Hillman plant is shut down, a $15 million biomass fuel market that directly supports more than 150 forest workers and provides critical services to the forest products industry would be lost, Audette said.

Kent County, which built its waste-to-energy facility in 1990, could see an annual decline of $2 million in revenue that would have to be passed on to residents in higher disposal costs if the MPSC rates go into effect, said Darwin Baas, Director of Kent County Department of Public Works.